1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 APRIL 26, 2017 10 11 SALES AND USE TAX APPEAL HEARING 12 APPEAL OF 13 DOOMID, INC. 14 NO. 416893, 552763 (DF) 15 NO. 626011, 681012 (DF) 16 AGAINST PROPOSED ASSESSMENT OF 17 SALES AND USE TAX 18 19 20 21 22 23 24 25 Reported by: Jillian Sumner 26 CSR No. 13619 27 Kathleen Skidgel 28 CSR No. 9039 1 1 P R E S E N T 2 For the Board of Equalization: Diane L. Harkey 3 Chair 4 Sen. George Runner (Ret.) Member 5 Jerome E. Horton 6 Member 7 Fiona Ma, CPA Member 8 Yvette Stowers 9 Appearing for Betty T. Yee, State Controller 10 (per Government Code Section 7.9) 11 Joann Richmond 12 Chief Board Proceedings 13 Division For Board of 14 Equalization Staff: Jeff Angeja Tax Counsel IV 15 Legal Department 16 Ramona Veregge Business Taxes 17 Specialist III Legal Department 18 For the Department: Nenita DeLaCruz 19 Hearing Representative Business Tax and Fee 20 Department 21 Kevin Hanks Chief 22 Business Tax and Fee Department 23 Stephen Smith 24 Tax Counsel IV Legal Department 25 For Petitioner: Shawn Nazari 26 Representative 27 ---oOo--- 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 APRIL 26, 2017 4 ---oOo--- 5 MS. HARKEY: Thank you, Ms. Richmond. Can 6 you please introduce our next item? 7 MS. RICHMOND: Our next item is Item C10a 8 and C10b. 9 Doomid Inc., please come forward. 10 And this taxpayer has been granted an 11 additional 10 minutes, so they have 20 minutes to 12 present their case. 13 MS. HARKEY: It's actually two cases, if I 14 recall. 15 Okay. Ms. Veregge, will you please 16 introduce the issue in this case. 17 MR. VEREGGE: Madam Chair and Board 18 Members, the appeals before you have three 19 unresolved issues, which are whether adjustments are 20 warranted to the unreported taxable sales, whether 21 petitioner established that it is entitled to a 22 bad-debt deduction in connection with prepaid sales 23 tax on diesel fuel, and whether petitioner is 24 negligent. 25 And I would also like to remind the Board 26 that this matter is subject to Section 40, and will 27 require a published decision. 28 MS. HARKEY: Thank you. 3 1 Okay. To the petitioner, please introduce 2 yourself for the record. And you will have 10 3 minutes, and then we will go to the Department who 4 will also have 10 minutes. 5 Or I guess you're going to have 20 minutes, 6 right? 7 MS. RICHMOND: Yes. 8 MS. HARKEY: And then we'll go to the 9 Department, and then we'll come back to you for 10 rebuttal. 11 Thank you. 12 MR. NAZARI: Thank you. 13 Shawn Nazari for Doomid Inc. 14 MS. HARKEY: Pull your microphone closer to 15 you. There you go. 16 MR. NAZARI: Is that better now? 17 MS. HARKEY: Pull it up, because you're 18 not -- no, no. Pull it closer -- 19 MR. NAZARI: Oh, okay. 20 MS. HARKEY: -- and talk in it. 21 MR. NAZARI: Is that better? 22 MS. HARKEY: Yeah, that's better. 23 MR. NAZARI: Shawn Nazari for Doomid Inc. 24 We operated -- in 2003 we operated -- lube 25 was the oil change place in Mojave Desert up to 26 2006. And from 2006 -- I'm sorry -- from 2007, and 27 2007 to 2012, we started operating the truck stop in 28 Mojave Desert known as the prepaid truck stop. And 4 1 we received a notice that we audit. 2 What's happen, in 2006, we had one of our 3 customers file a bankruptcy and fall behind on his 4 payment for $530,000. So what we did, we waited, we 5 continued, kind of like, negotiate with the client 6 to see if he can recoup any money out of it. But we 7 wasn't successful. 8 So what we did, we file for credit with the 9 State Board of Equalization, under tax prepayment of 10 the sales tax and the prepaid taxes. 11 Excuse me. My voice is gone today. I'm 12 sorry. 13 So when we file a claim for get our prepaid 14 taxes back, it's about $67,000. Instead, decide to 15 do the audit. That's no more. So we set that 16 appointment with the auditor. 17 The first auditor came in, she had no 18 knowledge of the fuel business. We had transferred 19 10 boxes of documents to the CPA office and 20 everything was organized in order for the auditor to 21 examine the paper. She read through it. She didn't 22 know what -- what is all the paper is all about. 23 And what she did, she kind of, like, started audit 24 on prior business, the Newport business. And the 25 document was accurate. There was no liability. So 26 they closed from the 2003, 2005. They said, "That's 27 fine." It is, you know, accurate documentation. 28 But from the 2006 to 2000 -- for the 5 1 prepayment sales taxes, the auditor didn't know 2 what's going on. So we changed another auditor, and 3 they -- they said they do not see any section in the 4 law to allow me for claiming for bad debt. 5 So we went to the -- to the A to Z on the 6 audit manual, we find every section says that we are 7 entitled to the bad debt credit if the amount that 8 is owed to us is uncollectible, is a worthless. But 9 the auditor saying there is no section in the law, 10 "I cannot allow you bad debt credit." 11 Then for a period of the 2007 and 2008, we 12 had some retail fuel sales that is -- was 13 documented, there was a selling price, purchase 14 price, everything was available. But at that time, 15 the auditor decide to use national average pricing. 16 Well, we ask them, you know, "This is a 17 document. Just look at it." She would not. And 18 national average pricing on the fuel is not 19 adequate. Because the truck stops like Flying J, 20 Pilot, everybody, for example, today is selling 21 $2.25 per gallon. But the Chevron gas station in 22 Los Angeles selling $5.50 per gallon. And if you 23 take the mean average, it is too many outlanders in 24 statistic. It doesn't work. So -- and they did not 25 audit the book while the documentation was 26 available. 27 So what's happened on the first audit, we 28 tried to claim to get some money back on the tax 6 1 bad-debt credit. Well, and our documentation was 2 accurate that we don't owe any liability, because 3 the auditor did the rapid look, but they did not -- 4 decide not to audit the fuel business. 5 So instead of getting $67,000 back on the 6 bad-debt credit, we ended up owing them $118,000 of 7 the inflated pricing without examining the ac -- 8 actual documentation. 9 And there was -- an error was made from the 10 beginning from the first auditor. I don't know how 11 she figured it out. The second quarter of 2007, 12 then, supposedly we are overstated our prepayment 13 sales tax by $7,000. 14 So we went through the documentation, we 15 pulled the fuel invoices, what they paid to the 16 vendors, and there was Chevron Oil Company Refinery, 17 Conoco, and a -- yeah, it was Chevron and Conoco. 18 So what we did, we pulled the invoices out, and 19 showed the auditor exactly what we paid as a 20 prepayment sales tax. "You making some kind of 21 error some place. Can we compare with your 22 documents, see where the error is?" 23 Well, she would not allow us to look at 24 their papers, says she's not allowed to. She can't 25 compare it to my paper. But we are overstated our 26 prepayment sales tax, as somebody I have in the 27 exhibit I posted today. It shows the number of the 28 gallons, the date we purchased, and the amount of 7 1 prepayment sales tax we paid. 2 But auditor decided, "You overstated by 3 $7,000." Says page No. 1 of 1, with no explanation 4 why she came up to that conclusion. 5 So here we are. We file a claim for bad 6 debt, and they didn't audit our books. They used a 7 national average pricing that is not accurate. They 8 refused to audit our book, and they created a 9 liability of $118,000. 10 And it was so disappointed in what the 11 auditor was doing. We end up to the Hearing Board, 12 and the talking to Mr. Matthies, and he was agreeing 13 with us. But halfway through the hearing, he's now 14 suggesting that we should go through the settlement. 15 So I question him, "Why do I have to go 16 through the settlement when I'm just asking to 17 correct your error and solve the problem where we 18 have?" His suggestion was, "Well, my D&R is not 19 gonna be binding. It's still gonna rely on the 20 State, what they want to do." 21 And it's kind of like I was disappointed, 22 and I made a comment to him, "Well, it was a waste 23 of my time, then." So he didn't like my answer. So 24 he make it right in the D&R, changing it as what we 25 were verbally was discussing to write in there he's 26 not commending the bad-debt credit to be allowed. 27 So I went through my paperwork, pulled all 28 the evidence up, pulled out a section from the audit 8 1 manual for Board to make a decision on that. 2 MS. HARKEY: Are you finished? 3 MR. NAZARI: I hope so. Yes. 4 MS. HARKEY: Oh. Thank you. I'm sorry. I 5 was told you were going to have 20 minutes. So 6 we'll come back to you. 7 MS. NAZARI: No, I'm using my 10 minutes 8 for the other one. The other one is --- 9 MS. HARKEY: The other one's the big one. 10 MR. NAZARI: Right. 11 MS. HARKEY: Okay. Are we taking these 12 together or are we bifurcating these cases? Can 13 anybody answer me? 14 MR. ANGEJA: On the agenda, you've got them 15 consolidated. Which is why they've also qualified 16 for Section 40. And because they've been noticed 17 that way, they've got to be heard together. 18 MS. HARKEY: Okay. 19 Can you go on with the second case, then, 20 that's at issue? 21 MR. NAZARI: For the second audit, while we 22 are arguing the first audit, we received another 23 notice for our second audit. And we got our stuff 24 together, our paperwork together -- excuse me 25 (unintelligible). 26 We start gathering our paperwork together, 27 and getting ready for audit. So the auditor was 28 Mr. Consigli. While we -- we weren't able to 9 1 contact the auditor after -- 2 MS. HARKEY: Excuse me. 3 MR. NAZARI: Yes. 4 MS. HARKEY: Can we bifurcate these, so 5 that we don't -- because these are two separate 6 cases, or do we have to hear them together? 7 MR. ANGEJA: I think how you conduct the 8 hearing can be up to you. For notice purposes, 9 they're still together. So we're still subject to 10 Section 40. 11 MS. HARKEY: It doesn't change that. 12 Okay. I'm sorry. 13 MR. ANGEJA: Because of the agenda. Unless 14 you wanna -- 15 MS. HARKEY: Continue. You have -- 16 I think they're similar issues, are they 17 not? 18 MR. NAZARI: They are. 19 MS. HARKEY: They are. Okay. 20 MR. NAZARI: We got notice of second audit, 21 and we contacted the auditor to see what he wants to 22 see, then we can get the paperwork together for him 23 for his examination. As in my -- I have in the 24 exhibits of the communication with the auditor. 25 Well, we simply asked him -- this audit 26 situation from the first one to the second one, he 27 started sucking the life out of, you know, all of us 28 -- "What do you need to go through the audit and 10 1 finish it? Because we are trying to get off the 2 business so we had no problem." 3 So he responded that he needs 14 grand, 4 only Mondays. And he needs quarterly filing. And 5 he wanted to see the worksheet for his filing, you 6 know, how we file taxes. And he wanted to see daily 7 sheet. 8 So we get all -- all the different paper he 9 requested together. And one time we had a meeting 10 with him, and he came to the place of business. And 11 he said, "Well, I need you to sign a waiver, because 12 I think you have 7,000-something credit. And if you 13 don't sign the waiver, you're gonna lose it." 14 So I said, "Okay. Here's the signed 15 waiver." We signed the waiver, then we didn't hear 16 from him again. 17 Next thing we see, we have notice of 18 determination for 500-some-thousand dollars. How 19 did 500-some-thousand dollars of determination come 20 up? We were lost. We are expecting him to come to 21 the examination. 22 So even though we sign a waiver for him, 23 and what he did, he urgency filing for telephone 24 filing or something like that. His -- kind of like 25 goes on his own, get it as to number of the gallon 26 we purchase, through the HG -- HC gallon, and 27 multiply by national average, and creating a 28 liability versus what we paid -- what he expected us 11 1 to pay. 2 And next minute we had, he stopped by and 3 he said, "Well, I know you're not going to agree 4 with it. I didn't have time. I had to do it. But 5 you're filing a determination, and then we can do 6 audit and we solve all the issues." 7 That was the last we heard from him, for 8 our file was balanced into Ventura to San 9 Bernardino. Something of changes were going on 10 through the State Board. So we didn't hear nothing 11 from anybody for three or four years, because 12 they're looking for him. Until we heard another 13 paper -- we received another paper from Ventura, 14 then, for collection. 15 So we discussed it with them, we filed a 16 notice of determination. We expecting something -- 17 to hear something from the State Board. So the file 18 goes back to Bakersfield office. 19 So we get back in contact with our original 20 auditor, Consigli, and we told him, "Here is the 21 paper. You asked for it five years ago. Audit." 22 You know? That's all the paper you wanted, daily 23 sheets, report sheet, filing, and summaries. 24 Well, what he says, "I don't need it. I 25 just need one sheet, one day." 26 I said, "Well, you're auditing me for 27 three-and-a-half years." What is it -- almost 40 28 months -- 38 months. "You just want for one day, 12 1 one sheet?" He said yeah. 2 So we faxed him one day-shift paper. Then 3 in this process we hired three CPAs, three 4 representatives. And we keep paying the people to 5 get in touch with the State Board to see what they 6 need for audit. 7 And as the letters in the exhibits, none of 8 them was successful to get in touch with the 9 auditor, even just up through contacting the 10 supervisor. 11 And in the letter I got from CPA, one of 12 the CPAs says his supervise promised him to get in 13 touch with the auditor, have him call you sometime 14 next week. 15 So what's happened in the meantime, there 16 is a distributor in Mojave. Then he does not 17 wholesale. He has his own car lot, he has his own 18 truck stop and gas station. A little ball plant 19 outside a corner of the Mojave. Mostly what he does 20 was transporting the fuel, charging for 21 transportation. 22 Sometimes we buy fuel from the distributor 23 when it says all diesel have to come from Long 24 Beach, and maybe parts to Mojave. And sometimes we 25 just put in the fuel because the trucks stops all 26 the fuel. We would purchase some from him. 27 So his was charging us, since he was -- we 28 didn't mind, because he was giving us like 10, 15 13 1 credit too. He was charging us retail value, retail 2 price, plus transportation, because he had to pump 3 it from his thing to the truck, and deliver it to 4 the cross town. 5 So he would be highest price fuel we ever 6 purchased. And in that period, the quarter, the 7 auditor requested, "Get the invoices from the 8 distributor." He was seven invoices, I believe 9 three of them was like, what, 1,100 gallons, 1,500 10 gallons, and three or four of them was 7,000 11 gallons. But it represented like five percent or 12 less that the total purchase for that quarter. 13 So he take that one shift, and then less 14 than 5 percent, and he knew what the situation is 15 with that distributor. 16 He get that fuel invoices from that guy and 17 said, "Well, your price is -- you sold less than you 18 purchased. I cannot accept that." 19 So we start to write him a letter. We 20 start to send him additional shift paper 21 documentation. We send the paper saying it was 22 higher than your national average. I said, "Oh, 23 okay. This is higher than national average, you 24 know. I can't take that either." So it's lower 25 than national average. I can't take that either. 26 So no matter what we did, how many CPA I 27 contact and tried to talk to him, he refused to do 28 the audit. He said my paperwork is not accurate. 14 1 Now, my paperwork is generated 2 electronically from the point of sale. Then every 3 product, even the bubble gum in the store need to be 4 scanned. So there is nobody handling nothing, 5 everything be scanned. 6 And just like every gas station, you go 7 purchase your gas, when you put your debit card or 8 ATM in there, is automatically transferring money 9 from your bank to the account. So it's nothing that 10 anybody could manipulate it. 11 We offered him to go look at it. You 12 cannot make a decision on eight-hour shift and four, 13 five invoices from distributor that come to less 14 than five percent of the -- there is 95 other 15 percent purchases. 16 And says, fortunately, since you are trying 17 to sell the property since 2009 of the first audit, 18 the different -- we had three or four different real 19 estate agents who was gonna list the property for 20 sale. So there is a Google pictures, and the 21 business broker pictures, you know, taking picture 22 of that part. And some of them clearly shows the 23 posted price is matches what we faxed to him by two 24 cents. And that was the exhibit they're passing out 25 today. 26 They -- I mean, documents say something. I 27 have a photo from Google -- Google Earth. I have 28 nothing to do with Google Earth. I couldn't 15 1 manipulate that. It shows the price my paper says. 2 Document generated by the point of sale and Clearing 3 Houses, because the transportation company, one of 4 the highest costs they have is the diesel fuel. 5 They go purchase their fuel where it was cheaper or 6 get more discount, and they're just gonna pay cash. 7 So we offered him Clearing House receipts, 8 payment receipts that shows clearly what we got for 9 what we got, how much we got. And, no, he didn't 10 want to see it. 11 MS. LOPEZ: Okay. Your time has expired. 12 MS. HARKEY: Thank you. 13 To the Department, please introduce 14 yourself for the record, and you have some minutes. 15 However long you need, I guess. 16 Thank you. There are two cases. 17 MS. DeLaCRUZ: Good morning, Chairman 18 Harkey and Members. My name is Nenita DeLaCruz, and 19 I will be representing the Business Tax and Fee 20 Department today. 21 To my right is Kevin Hanks, also with the 22 Business Tax and Fee Department. And to Mr. Hanks' 23 right is Stephen Smith with the Legal Department. 24 The petitioner, Doomid Inc., a corporation, 25 operated two locations on July 23. Petitioner 26 operated a location at which it provided roadside 27 service, truck repair services, and sold repair 28 parts. 16 1 In January 2006, petitioner also began 2 selling diesel fuel at wholesale. 3 From January 2007 through December 2012, 4 petitioner began retail sales of diesel, and also 5 operated a truck stop and mini-mart at another 6 location. 7 Today we will be discussing the two audits 8 conducted by the Department for the audit periods 9 April 1st, 2005 through September 30, 2008, and 10 January 1st, 2009 through June 30, 2012. 11 For the audit period 2005 to 2008, 12 petitioner provided the federal income tax returns 13 for 2005, profit and loss statements for 2005 and 14 2006, merchandise purchase invoices, SG tax returns, 15 sales and use tax returns, and diesel fuel sales 16 invoices for the fourth quarter 2006. 17 Petitioner did not provide any of the sales 18 reports used to prepare its sales and use tax 19 returns. 20 For the period April 1st, 2005 to 21 December 31st, 2006, petitioner's sales consisted of 22 nontaxable sales of diesel fuel and miscellaneous 23 truck repairs. Petitioner's only taxable sales for 24 this period resulted from the sales of truck parts. 25 The Department accepted petitioner's 26 reported taxable part sales for the audit period. 27 Beginning January 1st, 2007, petitioner 28 began making retail sales of diesel fuel and 17 1 mini-mart merchandise sales. 2 The Department computed the audited gallons 3 of diesel fuel purchased and sold by dividing the 4 prepaid sales tax by the applicable prepaid sales 5 tax rate. This amount was reduced by 11,051 gallons 6 to account for documented theft of diesel fuel for 7 the period June 1st, 2008 through September 30, 8 2008. 9 For each month in the period January 1st, 10 2007 through September 30, 2008, the Department 11 computed the statewide monthly average selling 12 prices, including sales tax reimbursement based on 13 diesel fuel selling prices from the U.S. Department 14 of Energy, Energy Information Administration, EIA. 15 Using the petitioner's available daily 16 sales reports, the Department determined 17 petitioner's average diesel fuel selling prices were 18 .42 cents per gallon less than the EIA prices. 19 The Department applied adjusted diesel fuel 20 selling prices, excluding tax reimbursement, and 21 stayed excise tax to the audited total gallons of 22 diesel fuel purchased to compute petitioner's 23 expected diesel fuel sales of $9,087,738 for the 24 period January 1st, 2007 through September 30, 2008. 25 Because petitioner provided no sales 26 records for mini-mart sales, the Department 27 estimated taxable mini-mart sales to be 1.5 times 28 the nontaxable mini-mart sales based on audits of 18 1 similar businesses. 2 Petitioner contends that the audit diesel 3 selling prices are overstated because they charge 4 .6 cents less for credit card sales, and the 5 Department used a higher credit card selling prices 6 in computing the average selling price for diesel. 7 The Department already accepted the selling 8 prices listed by the petitioner to establish the 9 selling prices for which no source documents, such 10 as cash register tapes, were provided. 11 The Department requested the petitioner to 12 submit documentation to support lower diesel selling 13 prices, but petitioner informed the Department that 14 they could not provide any additional documentation. 15 Petitioner claimed a bad-debt deduction on 16 the fourth quarter 2006 return for prepaid sales tax 17 on diesel fuel not paid by its customer for which 18 they should be granted a refund. 19 Petitioner acknowledges that it billed its 20 customers -- that its customer, $1,153,375 for 2006, 21 including $67,859 for a portion of the prepaid sales 22 tax for the fourth quarter of 2006. Later, 23 petitioner made sales of $3,148,098 to the same 24 customer in 2007. 25 According to Doomid's accounts receivable 26 aging summary as of December 2007, only $42,760 was 27 over 90 days old. Meaning that 4,000 of the fourth 28 quarter 2006 liability was likely paid in full. 19 1 Moreover, we haven't seen evidence that the 2 alleged bad debt in accordance with Section 6480.6 3 of the Revenue and Taxation Code. 4 For the above reasons, the Department 5 concludes that petitioner has not suffered the 6 alleged bad debt. 7 For the audit period January 1st, 2009 8 through June 30, 2012 the petitioner did not provide 9 books and records. Petitioner states that they 10 prepared their sales and tax returns from daily 11 sales reports generated by their point-of-sale 12 system. 13 To establish audited taxable sale of diesel 14 at the truck stop, the Department used petitioner's 15 prepayments of sales tax to distributors of diesel 16 fuel, and the applicable prepayment rates to compute 17 number of gallons of diesel fuel purchased. The 18 Department reduced that number by the gallons of 19 diesel fuel sold for resale for the period of 20 October 1st, 2011 through June 30, 2012. 21 The Department then obtained the diesel 22 fuel selling prices from the U.S. Department of 23 Energy, Energy Information Administration, EIA, and 24 compared petitioner's selling prices from two 25 observe Monday cash selling prices, and two Mondays 26 from the petitioner's daily sales reconciliation 27 reports, and computed a price differential of 31.8 28 cents below the EIA selling prices. 20 1 The Department further reduced the audited 2 selling prices by the applicable per gallon 3 California excised tax rate, and by the sales tax 4 reimbursement included and used. He adjusted 5 audited selling prices and the audited number of 6 gallons of diesel fuel sold to compute audited 7 taxable sale of diesel fuel. 8 To establish audited taxable mini-mart 9 sales, the Department estimated that petitioner's 10 taxable mini-mart sales would have a ratio of 11 41 percent exempt food sales, and 59 percent taxable 12 sales based on audits of similar businesses to 13 compute audited taxable sales, which exceeded the 14 petitioner's reported taxable sales. 15 The Department denied petitioner's claim 16 for refund for the first quarter 2012 since audited 17 taxable sales for that period exceeded taxable sales 18 reported on the sales and use tax return originally 19 filed. 20 Petitioner argues that the audited taxable 21 sales were estimated using the average diesel fuel 22 prices per gallon for California, and, therefore, 23 the results are inflated. 24 The Department estimated that petitioner 25 sells diesel fuel at 31.8 cents per gallon less than 26 the EIA statewide average prices. That is a 27 significant price differential, and petitioner has 28 not provided source documents such as cash register 21 1 tapes or daily sales reports showing that it sold 2 its diesel fuel for prices that were more than 31.8 3 cents per gallon below the EIA statewide average 4 selling prices. 5 The Department finds that further 6 reductions to the audited selling prices are not 7 warranted. 8 The Department imposed the negligence 9 penalty because petitioner failed to provide any 10 books and records, and because the petitioner's 11 taxable sales were substantially understated. 12 Petitioner was previously audited, and the 13 petitioner's books and records were incomplete and 14 inadequate for sales and use tax purposes. During 15 the audit period at issue here, petitioner did not 16 provide any source documents, such as point of 17 sales -- point of sale reports to support the 18 amounts reported on its sales and use tax returns, 19 and did not provide diesel fuel purchase invoices to 20 support the claimed prepaid sales tax credits. 21 Petitioner asserts that the documents are 22 available, but to date, the documentation provided 23 by petitioner has been minimal. 24 The error rate in this audit, nearly 25 25 percent, is higher than the previous one of 19 26 percent. We find the petitioner's repeated 27 record-keeping errors and reporting error found in 28 the prior audit is further evidence of negligence. 22 1 For both audits, the Department concurs 2 with the findings of the Appeals Division, and 3 concludes that no adjustment is warranted. 4 MS. HARKEY: Thank you. 5 You now have, um, maybe 10 minutes on 6 rebuttal. 7 MR. NAZARI: Okay. 8 Regarding the first audit, I notice that 9 she has wrong information. And she is saying 10 something that is not accurate. 11 MS. HARKEY: Okay. It might help -- it 12 might help if you describe step by step -- 13 MR. NAZARI: I'm sorry. 14 MS. HARKEY: -- what the bad information 15 was. 16 MR. NAZARI: Okay. We had all the books 17 and records available readily for them to examine, 18 as I have it here, but the auditor wanted it. But 19 wanting to always say that taxpayer never presented 20 no books, no records, nothing was available. I 21 don't know what I have to do to show them that -- if 22 you look at the first D&R, the hearing officer, 23 through the chain of mail, he pointed them exactly 24 to every single invoices, purchase invoices, selling 25 invoices, and suggesting the State Board to go to 26 look at this one, that one, to see if he can give 27 the guy a credit. That was all in the exhibit. 28 And what the State's now saying, I did not 23 1 provide any sales invoices. So where the D&R got 2 his information from if I did not provide any 3 documentation? 4 And talking about the first audit that she 5 mentioned, there was no books and record available 6 so they could establish a selling price. And that's 7 incorrect, because the books and record was really 8 available for them to look at it. They were not 9 looking at it. They're just going off the national 10 average sometime from 60 to $1.50 above the actual 11 selling price. 12 What we had to do, we had a fuel test, 13 somebody installed the fuel to transportation 14 company. So we had to come to compromise with them, 15 offer them, "Would you accept the court paper?" And 16 they said, "Okay. We'll look at the court paper." 17 The auditor's supervisor accepted it. 18 So we handed the court -- the judgment 19 paper, shows clearly how many gallons was stolen, 20 and how much we have filed a claim. Obviously, we 21 file a claim on the highest posted price we sell it, 22 because it's a lawsuit. I'm not gonna give a guy 23 who stole my fuel a discount. 24 So I charge -- file a claim on the credit 25 price, highest posted price, and the amount of fuel 26 was dismissed -- disappeared through the court paper 27 was 18,001 gallon. They reduced it to 11,000 28 gallons by the State. 24 1 We did it exactly with -- to just get it 2 over with, you know, through your audit. And they 3 accepted they pay price per gallon from the court 4 paper shows how much -- they wouldn't accept the 5 point of sale, anything. They don't want to look at 6 it. 7 So finally they accept the court paper, the 8 judgment, and they reduced the price of the national 9 average by .40 cents. Then it still was 10 overinflated, because the fuel price -- when you 11 look at gas station in your corner neighborhood, 12 changed price quickly, every 5 days, every 10 days, 13 overnight. You cannot just consolidate a whole two 14 years together, so .40 cents of everything, and 15 that's it. 16 What we did, we came -- okay. We accept 17 your adjustment. You took the court price, but look 18 at the court price was a credit posted price. Would 19 you give him my cash discount? Every gas station 20 has cash and credit. And shocking business, 95 21 percent plus they purchase at the cash discount 22 price, or otherwise they go to Pilot, they go to 23 Flying J. 24 The auditor, Mr. -- Mrs. Ontiveros 25 (phonetic), she start to bargaining with me. "If I 26 give you that, I'm not gonna accept that price." I 27 was very mad. I said, "I'm not asking for a 28 waiver -- favor. I don't need you to do me a favor. 25 1 I need you to do the correct job. This is the 2 paper, that's what I sold. This is the point of 3 sale." 4 You take a court paper, judgment shows how 5 many gallons was stolen for how much dollar. You 6 take that one, you don't want to give me my credit. 7 You reduce my prepayment sales -- prepayment sales 8 taxes by $7,000 while I have the list shows every 9 single gallon, where I bought it, where I didn't 10 bought it. 11 I even settled for whatever the State -- 12 their own paperwork was saying. So, okay, your own 13 paperwork says I'm entitled two-and-a-half percent 14 of the gross sale as a cash discount sale. So 15 two-and-half percent of the gross sale, whatever it 16 is, I calculated. It's in your exhibit. 17 Seven-and-a-quarter percent sales taxes on that one, 18 so I'm entitled at least to that minimum amount of 19 sales tax. 20 They're just kind of like, "No, we don't 21 want to give it to you." It's not something you -- 22 I'm asking you to give it to me. It's something 23 that's mine. You overcharging me. The paper is 24 black and white, all over says you're overcharging 25 me. Do your audit. Don't guess. Don't assume. 26 You know? 27 If you look at in the exhibit, there's a 28 sheet of paper, there's a point of sale from 26 1 printout machine is -- shows even how many bubble 2 gum they sold, because everything is scanned. And 3 how many Pepsi they sold, what cancelled. The 4 coffee was complimentary, and the convenience store 5 is very small. Because mostly cashier station for 6 the fuel. 7 And instead of looking at the actual 8 taxable sale, nontaxable food sale, they said, 9 "Okay. We accept your nontaxable sale, but we 10 assume your taxable sale was 150 percent of that 11 amount." 12 If you're accepting my nontaxable sale, why 13 don't you accept my taxable sale too? Examine it. 14 Look at it. Know we have a similar business, we 15 just match with similar business. 16 We charge you 150 percent of what your 17 nontaxable sales says in your report as a taxable 18 sale. And that truck stop, most of his income of 19 the sale is nontaxable, because they didn't have a 20 scale. A scale is nontaxable. 21 So he rang in the cash as nontaxable, you 22 know, scale. Or flat tire on a truck tire, they do 23 a service, they are not taxable, they are labors. 24 Our taxable is square feet. 25 Three cooler is not a big truck stop like 26 the picture I show -- you have it right here. It 27 shows everything in detail. Three cooler and then 28 two rack of chips and candy is not -- it wouldn't 27 1 create 150 percent of the nontaxable sale. But 2 nontaxable sales is included in scale, repair, chips 3 and candy, water, all the things, and start going 4 up. 5 But that's all I ask him. Examine the 6 paper. Look at it. This is my serve report. These 7 10 boxes that are sitting out there. But the 8 response -- the first auditor respond was, "You 9 don't really expect me to go through all this paper 10 for you?" 11 So what do you want me to give you? If it 12 is 10 boxes, you tell me you don't expect me to go 13 through those papers while it's organized folders, 14 date and everything. 15 She just disorganized it and look at it, 16 "Oh, you really don't expect me to go through that 17 for you?" 18 Called the supervisor to change it -- to 19 change the auditor to the gentleman named Florence. 20 He was knowledgeable about fuel business and truck 21 stop, and we are progressing with him. But before 22 he's finished, he was transferred. 23 Then we had the third auditor from the 24 State come, Ms. Ontiveros. And she is bargaining 25 with me. I'm asking -- this says "A, B, C, D" right 26 here, and this is not mine, this is like -- these 27 are massive card receipt. This is bad debt. The 28 guy didn't pay me. This is his bankruptcy report. 28 1 He filed bankruptcy. 2 This is my 2007 -- I think I sent a copy of 3 tax return to your office. You know? Is cash basis 4 and shows we had the, you know, more paid out than 5 we come in -- came in in 2007 because of almost 6 $600,000 losses on that guy. He filed a bankruptcy. 7 And the State know all about it, because 8 the State is one of the guy's creditor as well. The 9 State has 800-some-thousand dollars claimed against 10 the same guy that he took 500-some-thousand dollars 11 of mine. 12 And it still said they're denying. That I 13 didn't provide no paperwork, I didn't give him no 14 sales report. 15 Can I give you all the paperwork that you 16 want right now? I don't know what else I can do. 17 You know, I'm entitled to the bad debt. 18 I'm entitled to my cash sale tax discount -- cash 19 sale discount credit. I'm entitled to get my 20 $7,000. They reduce it on accusing me of 21 overstating my prepayment sales tax at the first 22 place -- first audit. That's why one of my 23 aggravation is I'm filing a claim to get my bad 24 debt. 25 ---oOo--- 26 27 28 29 1 ---oOo--- 2 MR. NAZARI: Somebody took 3 530-some-thousand dollars of my money. But six or 4 $7,000 was prepayment sales tax. 5 The chain of the email, state himself, 6 saying we changing our position. We accepting the 7 taxpayer entitled to the bad debt credit. 8 Then I posted all eight pages. Then the 9 section in the article in the Audit Manual says if 10 I'm not able to collect my taxes on the tax paid 11 purchase price, if the account become worthless, or 12 become as a -- you know, basically bankrupt, you 13 can't collect it -- I'm entitled to get refund on 14 it. And if I -- in case, if for some reason I get 15 something back from the guy who collect it, then I 16 report it back to state. But it was eight years 17 ago. I cannot collect it. He bankrupt. As a 18 matter of fact, he was discharged last year through 19 the bankruptcy court. 20 MS. RICHMOND: Time's expired. 21 MS. HARKEY: Okay, thank you. 22 Member Ma. 23 MS. MA: Yes. So I have a question to our 24 BOE staff. I know you said a number of times that 25 he did not provide any books and records. Yet he 26 has a big file on his desk and he said that all of 27 his products are scanned in. He seems to understand 28 his business in terms of what is taxable, what's not 30 1 taxable. So what's the discrepancy? 2 MS. DELACRUZ: Okay. For the second audit 3 he did not provide any books and records. However, 4 after the issuance of the D&R, he provided some 5 books and some records to us. So the auditor took a 6 look at it. And when he looked at the information 7 regarding the mini-mart, he computed for the taxable 8 sales for the second quarter 2011 and he came up 9 with a figure of $42,000. 10 Now, if you're gonna use that as basis for 11 the mini-mart sales for that particular audit 12 period, it's gonna increase the tax measure. So we 13 just stuck to whatever was computed during the 14 original audit. 15 Now, when it came to the amount of taxable 16 sales for the diesel fuel, um, when they computed 17 for the, um, sales, um, the amount of, uh -- the 18 sales amount per gallon of diesel fuel and compared 19 it with a cost of how much it is going to be per 20 gallon, there was a loss of over a dollar per 21 gallon, which sums up to over $600,000 loss for that 22 quarter alone. Which is why we couldn't accept 23 those figures for that particular audit period. 24 So, although they sent us additional books 25 and records with regards to the mini-mart sales, we 26 couldn't accept it. We did not accept it to the 27 benefit of the petitioner because it would increase 28 the tax measure. 31 1 And for the diesel sales, it didn't make 2 sense because it would inc- -- it would mean that 3 they incurred a lot of losses and they would not 4 have survived this -- this long for that particular 5 audit period. 6 We never got any sales invoices or purchase 7 invoices for the second audit period. 8 MS. MA: Yeah, so, um, to -- to the 9 taxpayer representative, Mr. Nazari. 10 MR. NAZARI: Yes. 11 MS. MA: I know you talked about buying 12 fuel from some local person whenever you ran out of 13 fuel. 14 MR. NAZARI: Yes. 15 MS. MA: And that's why -- 16 MR. NAZARI: For the whole quarter -- 17 MS. MA: -- the fuel cost was negative. 18 MR. NAZARI: For a whole quarter, the 90 19 days -- 20 MS. MA: Right. 21 MR. NAZARI: -- 90 days, if the truck start 22 purchasing -- 23 MS. MA: Right. 24 MR. NAZARI: -- like seven, 8,000 gallons a 25 day, okay, 90 days is like seven, 800 million 26 gallons. 27 How can you say for benefit of -- for my 28 benefit you're assuming based on like 30,000 gallons 32 1 in 90 days my liability would be increased without 2 looking at the actual facts? 3 One of the pictures I got right here is 4 clearly shows what I sent to the state for that 5 June of -- 6 MS. MA: 17th. 7 MR. NAZARI: June 17th, 2011. Page 18. 8 Okay. That's -- you know, the date is on 9 the bottom, the pictures. And rest says "Google 10 2011." 11 You know, this is -- say right there. And 12 then he looking at that, say, well, your paper shows 13 you were selling for 2.55, but you paid $3, for 14 example, for it. You -- I can't accept it. 15 They say, okay, you have to look at the 16 total. You know, sometimes the competition 17 sometimes sell $2, next day I sell 3.15, next day 18 sell 2.99. 19 You got to look at the picture overall. 20 Because, after all, as a business it's the bottom 21 line -- bottom number is the issue. To me, the 22 bottom -- bottom line is better. It doesn't matter 23 if I sell 2.50 for one week and $5 for next week. 24 So -- and we made several appointments for 25 him to come and examine the books. And the CPA send 26 him several letters and emails and ask him to set 27 the appointment. His response is an exhibit I 28 posted for you. He said, "I don't see any need to 33 1 keep appointment because your paperwork is not 2 correct; it's not adequate." 3 I mean, I don't know what else I can do. I 4 almost -- honestly, I almost desperately begged the 5 guy, "Would you please just give me two hours of 6 your time? You're charging this -- you send the 7 bill to state at 15 hours for simple multiplication 8 using ad hoc, getting the gallonage multiplied by 9 the national average EIA, you know, prices. But 10 would you give me two hours, examine the book I have 11 for you?" 12 He didn't like my answers. He didn't like 13 my questions. The question, if you had 15 hours, 14 you send me a Notice of Determination, but simply 15 your paper said "verification of audit." It says I 16 use it just as ad hoc. Use it as cheap numbers, 17 multiply it by compared to taxpayer. Here is a 18 $500,000 liability. 19 If he has been handed 15 hours to do 20 that -- I'm no CPA -- I can do better job in two, 21 three hours. "Would you spend two hours and examine 22 my books instead of assuming?" Instead of, you 23 know, just -- 24 MS. HARKEY: Member Runner? 25 MR. RUNNER: Yeah, just, um -- take me 26 through again, let me just focus on the -- on the 27 gas price issue, or the diesel price issue. 28 MR. NAZARI: Yes. 34 1 MR. RUNNER: Let me hear again from the 2 taxpayer. You provided some -- some material here 3 in regards to gas price -- or, excuse me, diesel 4 price. 5 MR. NAZARI: Right. 6 MR. RUNNER: And basically making the 7 argument, on the second page of what you provided, 8 you know, "Based on California average diesel price, 9 fuel prices the following retailers must be 10 understating their sales as well." 11 And then you used an -- then you used what 12 the averages are -- 13 MR. NAZARI: Yeah. 14 MR. RUNNER: -- that you believe the state 15 uses, and then what the real prices were. 16 MR. NAZARI: Right. 17 MR. RUNNER: Is that right? 18 MR. NAZARI: Yes. 19 MR. RUNNER: Have you seen that page? 20 It's -- these aren't numbered. Have you seen that 21 particular page in his -- it's, uh -- 22 There's two pages. 23 MS. HARKEY: California average prices. 24 MR. RUNNER: Yeah. There's two pages 25 there. The second one I'm interested in, which is 26 "California average prices." 27 So, again, tell me, review again with me 28 how it is that we establish average price and what 35 1 happens and why we -- how we avoid this particular 2 kind of a conflict? 3 MR. HANKS: Right. Mr. Runner, what we 4 attempt to do is to avoid having to look at these 5 observed prices and look at Department of Energy 6 pricing. Because in most instances we can look at 7 taxpayer's books and records, their point of sales 8 systems, their sales summary information and obtain 9 that information directly, whatever the diesel sales 10 are, and reconcile those to the amounts that get 11 reported. That's -- that's typical audit process. 12 In this process the records aren't supplied 13 so we don't have sufficient information to know what 14 the actual sales were. So in those instances our 15 procedure is to observe the posted sales prices and 16 then compare those posted sales prices with the 17 Department of Energy pricing and see if there's a 18 differential. And to the extent that there is, we 19 account for that differential in using Department of 20 Energy pricing then to establish what audited fuel 21 sales are. 22 MR. RUNNER: How did you do this in this 23 case? What did that -- in real numbers, what did 24 that mean for this particular case? 25 MR. HANKS: So in real numbers with this 26 case, we actually observed on two days what the 27 diesel posted sales prices were; and that's shown in 28 Exhibit 3, page 4 of 4, in the back of the D&R. 36 1 MR. RUNNER: Okay. 2 MR. HANKS: So we have an observed posted 3 price at the business of 4.33 a gallon, and we 4 notice the Department of Energy information is 4.40 5 a gallon. So the difference is 7 cents. 6 Likewise, we compare the pricing for 7 Monday, September 17, 2012 we have observed price 8 4.35. The Department of Energy pricing is 4.46. We 9 compare those amounts and see that that's 10 cents 10 less than the Department of Energy pricing. And we 11 do likewise with -- with other days. The other two 12 days actually are based on sales reconciliation 13 reports that the taxpayer supplied to us. 14 MR. RUNNER: Okay. So -- so let me go back 15 to the taxpayer. So -- so at least what I'm hearing 16 here is that we -- they don't just use the average 17 prices, but they actually compare the average prices 18 with your posted prices. 19 MR. NAZARI: Well, I disagree with that, 20 too. 21 MR. RUNNER: I'm sorry. What? 22 MR. NAZARI: I disagree. Because the 23 posted prices what Mr. Consigli telling -- saying on 24 his report, the three days, I don't agree with it 25 because I have evidence. 26 MR. RUNNER: You think your posted prices 27 were less? 28 MR. NAZARI: Yes, I have evidence. 37 1 Because -- 2 MR. RUNNER: What evidence do you have that 3 they were less? 4 MR. NAZARI: I have -- because matter of 5 fact 2012 -- first of all, 2012 has nothing to do 6 with 2010 or '11. We were audited from '09, '10, 7 '11 and six months of the '12. Posted price 8 irrelevant if you -- even if observation was 9 correct, assuming. On September or October 10 something in 2012 it couldn't be accurate. 11 You cannot justify 2009 and '10 and '11. 12 MR. RUNNER: Hold on, hold on. Let me go 13 back to that. You mean the posted prices though 14 were at the time of the audit, weren't they? 15 MR. HANKS: Yes. 16 MR. RUNNER: So the posted prices were at 17 the time of the audit. 18 MR. NAZARI: No, sir. No, sir. 19 MR. RUNNER: You don't believe they are? 20 MR. NAZARI: No. No, sir. Because posted 21 price -- the audit was up to June 2012. What they 22 did here is observe the prices. It was January 2009 23 to June of 2012. His posted prices say observed is 24 September. 25 MS. HARKEY: Of what year? 26 MR. RUNNER: Of what year? 27 MR. NAZARI: 2012. 28 MR. RUNNER: Is that -- again, let's -- 38 1 MR. NAZARI: Outside the audit. 2 MR. RUNNER: -- get down to the issues 3 here. 4 MR. HANKS: Right. So -- so what the audit 5 staff does is make the observation of those posted 6 prices just as soon as a determination is made that 7 we don't have sales records to reconcile to. So by 8 definition that's probably a couple of months after 9 the end of the audit period. 10 MR. RUNNER: So it was outside the audit 11 period? 12 MR. HANKS: So a couple of months after the 13 audit period. 14 MR. RUNNER: Okay. So, again, the posted 15 prices that you're using were outside the audit 16 period. 17 MR. HANKS: Correct. 18 MR. RUNNER: Okay. 19 MR. HANKS: Correct. But the other part of 20 this, though, is we're using Department of Energy 21 pricing from those earlier time periods based on 22 that Department of Transportation pricing 23 information from 2009, '10 and '11. So we're using 24 their pricing to establish what -- what average 25 sales or audited sales would be, but then as 26 adjusted by the allowance that we see the taxpayer's 27 making from those Department of Energy pricing 28 levels. So if they're selling the fuel at -- 39 1 MR. RUNNER: So you're using a ratio. 2 MR. HANKS: -- 30 cents less -- 3 MR. RUNNER: You're using a ratio that was 4 established at that time, after the audit, between 5 the posting price and the -- and the -- and the 6 averages. 7 MR. HANKS: Yes. 8 MR. RUNNER: And you're using then whatever 9 that average -- or whatever that ratio is and 10 applying it to the prices of the -- of the fuel back 11 on the time of the audit? 12 MR. HANKS: Well, it's not really a ratio. 13 So what we're assuming is based on -- 14 MR. RUNNER: Is it a spread of -- it's a 15 spread of some kind. 16 MR. HANKS: So what we're assuming is that 17 all the fuel that they're selling is sold at 30 18 cents less than what Department of Energy shows is 19 the average statewide diesel fuel sales rate. So 20 for every gallon of fuel that's sold in the audit 21 period, we're subtracting 31 cents from Department 22 of Energy pricing to establish what those audited 23 sales prices would be. 24 MR. RUNNER: And you would be saying that 25 in that particular time period your difference 26 between the average and what you were selling at the 27 time was -- was -- was not the same as? 28 MR. NAZARI: Well, what they did, the 40 1 auditor originally said 7 cents I absorb. 2 MR. RUNNER: Uh-huh. 3 MR. NAZARI: And then in September 2012, 4 then he goes back, apply that 7 cents across the 5 board 2009, 2010, 2011. And if you remember, in 6 2009 and '10, sometimes we pay five, over $5 a 7 gallon for gas. 8 MR. RUNNER: Right. 9 MR. NAZARI: You cannot apply 7 cents you 10 observe on September 2012 towards the, for example, 11 2009 or 2010. It doesn't work. 12 And why you want to go through that much 13 trouble when the papers ready for you to look at? 14 MR. RUNNER: Let me ask you that. Why -- 15 why would we go ahead and do that if indeed the 16 material -- if indeed the paperwork is there? 17 MR. HANKS: We wouldn't. 18 MR. RUNNER: Okay. Okay. So you would 19 believe you didn't see that paperwork. 20 MR. HANKS: Correct. 21 MR. RUNNER: And you would believe that you 22 now have that paperwork? 23 MR. NAZARI: If -- if you look at the D&R 24 for Mr. Okihara, the last D&R, he even attached my 25 letter to the auditor to his D&R. Then I'm begging 26 him to give me two hours to examine my paper. I 27 mean, how else I can provide you with paperwork if I 28 cannot make an appointment, if you refuse to talk to 41 1 me because I made the comment for 115 hours for just 2 multiplying two numbers? 3 MR. RUNNER: Mm-hmm. 4 MR. NAZARI: He would not meet with us. He 5 just saying, "Your papers not adequate." 6 MR. RUNNER: So you attached -- you -- you 7 attached -- you asked for the attachment or was it 8 attached to the D&R or was not? 9 MR. NAZARI: Yes, I sent a copy of my 10 letter to the auditor and send a copy to the D&R -- 11 MR. RUNNER: Okay. Let me ask again. 12 MR. NAZARI: -- Mr. Okihara. 13 MR. RUNNER: Has that -- has that 14 attachment been examined? 15 MR. HANKS: We've looked at everything 16 that was provided, you know, at the time of audit 17 and then post audit, because there was information 18 that was supplied to the appeals conference holder. 19 And it was actually the appeals conference holder 20 that then incorporated two more tests and 21 incorporated the sales pricing days reconciliation 22 reports that the taxpayer supplied for us for two 23 additional days. We averaged those two additional 24 days with our observed days to calculate that there 25 is a discount on the selling price of fuel made by 26 the taxpayer. 27 So we're assuming that every gallon of fuel 28 that they sell, they sold at 31 cents less than the 42 1 statewide average. So that's -- that's a 2 calculation that we're using throughout this time 3 period. But we're very mindful of the price of 4 fuel, obviously, varies throughout time. I mean it 5 went from $2 a gallon to $4 a gallon. 6 MR. RUNNER: Mm-hmm. 7 MR. HANKS: These numbers take that into 8 consideration. 9 MR. RUNNER: Well, they don't really take 10 it under consideration. I mean they try to take it 11 under consideration, right? I mean you just -- 12 because you said you just apply whatever that amount 13 of money is, whatever that difference is across the 14 whole board, right? 15 MR. HANKS: Well, we're just subtracting 16 that 31-cent discount, you know, to the average 17 selling price of fuel. So, for instance, fuel sold 18 for $2.23 a gallon -- 19 MR. RUNNER: Uh-huh. 20 MR. HANKS: -- in January or first quarter 21 of 2009. 22 MR. RUNNER: Mm-hmm. 23 MR. HANKS: We're subtracting 31 cents a 24 gallon from that. 25 MR. RUNNER: And so if it was selling for 26 $4, what would be subtracting? 27 MR. HANKS: 31 cents from $4. 28 MR. RUNNER: See, that's where I'm not sure 43 1 that's the right way to do that. See, I get that. 2 MR. HANKS: Yeah. 3 MR. RUNNER: I get what you're doing. 4 MR. HANKS: Yeah. 5 MR. RUNNER: But I'm not sure that is -- 6 I'm just trying to figure out whether or not is it a 7 ratio spread or is it -- is it a fixed spread? 8 That's what I'm trying to figure out -- 9 MR. HANKS: Right. 10 MR. RUNNER: -- to see if that makes sense. 11 Okay. Well, I'll listen to some other -- 12 I'm just -- 13 MS. DELACRUZ: I just want to add -- 14 MR. RUNNER: Yes. 15 MS. DELACRUZ: -- that the average selling 16 price from EIA would fluctuate depending on the fuel 17 prices. So like, for example, the fuel price will 18 increase by, let's say, $3, then that will be 19 reflected also in the EIA average. 20 So it still moves and it takes into 21 consideration the fluctuation of prices. And the 31 22 cents would be applied to it, to take into 23 consideration the actual prices of the fuel sellers. 24 Like in this case -- 25 MR. RUNNER: I'm just -- again, I'm just 26 not convinced that the 31 applies to any -- every 27 gas price. But I don't know how to fix that. I'm 28 just not -- 44 1 MR. HANKS: Right, right. 2 MR. RUNNER: Unless you have better -- 3 unless you have clear records. 4 MR. HANKS: Right, right. 5 MR. RUNNER: Let me go back to the 6 taxpayer. 7 See -- I mean, what kind of record did you 8 have then that would help us get there, to show what 9 the real prices were and what you were doing? 10 MS. HARKEY: Which audit is this? Is this 11 the first audit? 12 MR. NAZARI: This is requirement paper for 13 second audit. 14 MS. HARKEY: For the second audit, and 15 that's the big number. So what have you got? 16 MR. NAZARI: He asked for 4 -- 14 randomly 17 Monday. 18 MS. HARKEY: Right. 19 MR. NAZARI: Your quarterly filing and a 20 worksheet, and sheet papers -- 21 MR. RUNNER: Yeah. 22 MR. NAZARI: -- daily papers that shows the 23 gallons and the price and the detail. 24 MR. RUNNER: Gallon and price throughout 25 the whole audit period. 26 MR. NAZARI: For those -- 27 MR. RUNNER: I'm sorry. 28 MR. NAZARI: -- for those Mondays. 45 1 MS. HARKEY: For the Mondays. 2 MR. RUNNER: For the Mondays. 3 MR. NAZARI: To match the filing. He wants 4 to see everything matches. 5 So we went through our boxes, got them all 6 out, and no auditor. 7 MR. RUNNER: No what? 8 MR. NAZARI: No auditor. We can't find the 9 auditor. 10 MR. RUNNER: Okay. 11 MR. NAZARI: Our file transferred to 12 Ventura, went to San Bernardino. 13 MR. RUNNER: Okay. 14 MR. NAZARI: We end up to hearing. And 15 Mr. Okihara, at the hearing, he suggests that they 16 reaudit all the paperwork. 17 MR. RUNNER: Who suggested a reaudit? 18 MR. NAZARI: D&R -- 19 MR. HANKS: Appeals conference holder. 20 MR. RUNNER: Appeals conference holder. 21 MR. NAZARI: -- suggested to be reaudit. 22 MR. RUNNER: Okay. 23 MR. NAZARI: Well, for reaudit we have to 24 have an auditor. 25 MR. RUNNER: Right. 26 MR. NAZARI: We can't find him. He won't 27 return our call. He won't keep appointment. 28 MR. RUNNER: Would you have been open to a 46 1 reaudit? 2 MR. NAZARI: I'm sorry? 3 MR. RUNNER: Would you have been open to a 4 reaudit? 5 MR. NAZARI: Yes. Because D&R, original 6 D&R was saying recommended to be reaudit. 7 MR. RUNNER: Well, let me ask again the 8 process again. Let me just figure this out 9 because -- 10 MR. HANKS: So, what Mr. Okihara 11 recommended is that there be an adjustment made. So 12 what -- what he recommended is that we use the sales 13 pricing information from two of the days that the 14 taxpayer supplied and incorporate that into our test 15 for the two observed days that we had already 16 conducted and then average those amounts to see what 17 the discount, average discount is on the sales price 18 of fuel. 19 That's where it was determined the average 20 sales price discount was the 31 cents. 21 MR. RUNNER: Mm-hmm. 22 MR. HANKS: So actually Mr. Okihara, he 23 prepared the reaudit in a sense in the attachment 24 that he attaches to the D&R. And so he recommended 25 to the Department that we reduce the measure 26 accordingly by that adjustment. 27 MR. RUNNER: But is that a reaudit or is 28 that just a re-examination of -- I mean maybe I 47 1 don't know the terms well enough. But that doesn't 2 sound like a reaudit. 3 MS. HARKEY: You know, Members, I'd like to 4 call, because this is a Section 40 case and there is 5 just so much information. I'm not sure if these 6 documents were ever reviewed or not reviewed. 7 MR. NAZARI: No. 8 MS. HARKEY: It's a large dollar amount. 9 We're going to have to justify everything. And 10 there's a lot of issues here with just regard to 11 supplying books and records, what was available and 12 what wasn't, and also reviewing the bad debt. 13 So I would like to suggest that we do a 14 30/30/30 and come back to the Board and be sure that 15 all those papers are reviewed, be sure that we've 16 got accurate audit information. 17 I know what happened; you probably turned 18 every stone that you could turn, but maybe this will 19 be helpful. And if there's anything from the first 20 audit that you can provide -- because I think 21 these -- these individuals or their department would 22 be able to go through some of this rather rapidly 23 and work with you. 24 So -- 25 MR. RUNNER: I agree, I agree. 26 I've got one question though in regards 27 to -- 28 MS. HARKEY: Sure. 48 1 MR. RUNNER: -- the Section 40 issue. This 2 becomes a Section 40 because we've combined two 3 audits. Procedurally, I'm just not sure I know or 4 I'm comfortable with that. 5 MR. ANGEJA: It's not that they're combined 6 audits. It's that they were consolidated on the 7 agenda and the Board hearing calendar. 8 MR. RUNNER: Yeah, okay. That's even 9 different. Actually we made it a Section 40 simply 10 because we combined -- 11 MS. HARKEY: We consolidated it. 12 MR. RUNNER: -- the items. 13 MS. HARKEY: We consolidated them. 14 MR. ANGEJA: Which is normally prudent 15 because you have one taxpayer, common issues, you 16 don't have to talk about it twice. 17 MR. RUNNER: No, no, I get that. But by 18 doing that we've heightened kind of -- 19 MS. HARKEY: Heightened the -- the 20 awareness here. 21 MR. RUNNER: Well, and our response to it, 22 right, and what we have to do. 23 MR. ANGEJA: If they were calendared 24 separately, neither would be subject to Section 25 40. 26 MS. HARKEY: Okay. Can we change that on a 27 return, on a 30/30/30 or no? These are all new 28 questions, I understand that, but -- 49 1 MR. NAZARI: I hope you could have it two 2 separate case. 3 MR. RUNNER: I'd prefer to hear them 4 separately. 5 MS. HARKEY: I would prefer -- I would 6 prefer to hear them separately, too. And since 7 the agenda was -- 8 MR ANGEJA: With the Board's direction, 9 I -- 10 MS. HARKEY: The agenda was in my purview 11 but I didn't know -- it was just put there for me 12 and I thought that was probably the way to do it. 13 If it's not, then let's split them up. 14 MR. ANGEJA: We could do that at the 15 direction of the Board. 16 MS. HARKEY: And -- 17 MR. RUNNER: Yeah. 18 MS. STOWERS: Okay. Board okay with that? 19 MR. RUNNER: Yes. 20 MS. STOWERS: Yeah, that sounds reasonable, 21 a 30/30/30 and unconsolidate the two cases. 22 MS. HARKEY: Yeah, 30/30/30 and 23 unconsolidate the two cases. 24 Now what that means is that you will have 25 30 days to get all of your documentation to the 26 Department -- they will explain this to you -- and 27 then they'll have 30 days to review it, I think is 28 the case, and then there's 30 more days and you'll 50 1 come back to the Board if there's anymore issues 2 here that are unresolvable. 3 MR. NAZARI: Thank you. 4 MR. ANGEJA: Just for clarification -- 5 MR. HORTON: Madam Chair. 6 MR. ANGEJA: -- the motion would be to 7 continue the hearing. 8 MS. STOWERS: And to continue the 9 hearing. 10 MS. HARKEY: And to continue the hearing. 11 So I'm making a motion to continue -- to do a 12 30/30/30 and continue the hearing back at the 13 Board. 14 MR. RUNNER: Yes. Second. 15 MS. HARKEY: All in favor? 16 MS. STOWERS: Yes. 17 MS. HARKEY: Aye. Thank you. 18 MR. NAZARI: Thank you very much. 19 MR. HORTON: Madam Chair. 20 MS. HARKEY: Yes. 21 MS. MA: Take a break? 22 MS. HARKEY: Yes, we need to take a break 23 if that's okay. 24 MR. HORTON: Thank you, Madam Chair. 25 Madam Chair, I would ask the Department to 26 advise the taxpayer that interest continues to 27 accrue until such time that a payment's made. 28 MS. HARKEY: I just have a feeling there's 51 1 gonna be some adjustments once we get some books and 2 records. Maybe not. But, yeah, interest continues. 3 So haste. 4 ---oOo--- 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 52 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, Jillian Sumner, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on April 26, 2017 I recorded verbatim, in 10 shorthand, to the best of my ability, the 11 proceedings in the above-entitled hearing; that I 12 transcribed the shorthand writing into typewriting; 13 and that the preceding pages 1 through 29 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: July 21, 2017 18 19 20 ____________________________ 21 JILLIAN SUMNER, CSR #13619 22 Hearing Reporter 23 24 25 26 27 28 53 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, Kathleen Skidgel, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on April 26, 2017 I recorded verbatim, in 10 shorthand, to the best of my ability, the 11 proceedings in the above-entitled hearing; that I 12 transcribed the shorthand writing into typewriting; 13 and that the preceding pages 30 through 52 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: June 29, 2017 18 19 20 ____________________________ 21 KATHLEEN SKIDGEL, CSR #9039 22 Hearing Reporter 23 24 25 26 27 28 54